Raising Wages and Narrowing Pay Gaps With Service Sector Prevailing Wage Laws – Center For American Progress

State and local materials

Federal recommendations for executive action and legislative reforms

What are service sector prevailing wage laws?

Service sector prevailing wage laws require service workers on government projects to be paid wages and benefits that at least match market levels for workers who are employed in similar professions in a given area. For example, they set compensation floors for janitors on government-funded projects in Illinois and for security guards at publicly owned buildings in Montana. These laws are closely related to the better-known and more widely used prevailing wage laws that set standards for construction workers on government building projects such as bridges and highways. Prevailing wage laws also complement state and local minimum wage laws, since the wage and benefits rates they set are typically higher than minimum standards and target a specific subset of workers whose jobs are funded through government spending.

Prevailing wage laws help ensure that government dollars do not undercut market wages and benefits, bringing high-value services to the public and preventing contractors from slashing wages to generate low contract bids and undercutting employers offering good wages. They can also uplift pay and benefits while closing compensation gaps

Prevailing wage laws help ensure that government dollars do not undercut market wages and benefits.

Who uses service sector prevailing wage laws?

The federal government maintains a prevailing wage standard for its service contracts, as do eight states and several cities and counties. Since 1965, the McNamara-O’Hara Service Contract Act (SCA) has mandated prevailing wages for service workers on federal government contracts and contracts issued by agencies of the District of Columbia. The states of California, Connecticut, Illinois, Massachusetts, Montana, New Jersey, New York, and Washington also offer prevailing wages for their government service contracts. Implementation varies in terms of covered occupations and contracts. For example, Illinois covers food and security services, while New Jersey covers workers at airports and train terminals. However, every state and federal law includes janitors and custodians, making janitors an apt group to study when looking at these laws’ wage and benefits effects. Several cities and counties also have similar policies.

What does new research reveal about these laws?

New research by Frank Manzo of the Illinois Economic Policy Institute and Robert Bruno of the University of Illinois on the effects of state service sector prevailing wage laws from 2017 to 2019 finds that these laws boost wages and health insurance coverage for janitorial workers and custodians.1 It provides the most concrete evidence to date on the impacts of prevailing wage laws on service workers. These laws have seen relatively little research despite the extensive literature on the prevailing wage laws common in the construction sector. Controlling for a variety of both state-level and worker-level factors, Manzo and Bruno found service sector prevailing wage laws currently in place have the following effects on workers:

They support higher wages for janitors and custodians.
They increase the rates of employer-provided health insurance coverage.
They help narrow the racial pay gaps among janitors and custodians.

In addition, the authors of the study found that these benefits have little impact on employment. Based on these findings, policymakers should implement prevailing wage laws to ensure government spending does not drive down local standards and instead supports good jobs.

Janitors who live in states with these laws enjoy annual incomes 9.5 percent higher than those in states without them.

Support higher wages

As shown in Figure 1, Bruno and Manzo found that janitors earn substantially higher incomes in states with service sector prevailing wage laws. Janitors—the focus of the study because they are covered by all existing state prevailing wage laws—who live in states with these laws enjoy annual incomes 9.5 percent higher than those in states without them after controlling for state-level labor laws and worker-level conditions.2

Figure 1

Increase rates of employer-provided health insurance coverage

Prevailing wage laws also give service workers greater access to health insurance. Many do not receive employer-provided health insurance, which means they are left facing significant health care costs while already earning low wages. Many service sector prevailing wage laws require employer contributions toward benefits such as health insurance for contract workers, increasing the rates at which service workers have access to employer-provided health insurance. From 2017 to 2019, a janitor’s chances of maintaining health insurance coverage through their employer increased by 3.5 percent in states with service sector prevailing wage laws after controlling for state- and worker-level effects. (see Figure 1)

Narrow the racial pay gap

All covered workers benefit from increased wages and health insurance coverage under service sector prevailing wage laws. Janitors of color, however, see particular benefits, as the laws help narrow racial gaps in pay and health insurance access. As in many sectors, service workers face unequal pay across racial lines. From 2017 to 2019, white, non-Hispanic janitors in states without service sector prevailing wage laws earned a mean income of $26,555 per year—adjusted for inflation—while Hispanic or Latinx janitors earned $23,005 on average and Black or African American janitors earned $22,610. This disparity extends to health insurance coverage as well. By forcing employers to comply with base pay and benefits rates for covered workers—regardless of race—service sector prevailing wage laws increase compensation more for janitors of color than for white janitors. As shown in Figure 2, this narrows the gaps in wages and health insurance coverage between white and non-white janitors.

After controls, janitors of color earned 14.2 percent more annually and had a 4.7 percent higher likelihood of employer-provided health insurance coverage in states with service sector prevailing wages; white janitors earned 3.7 percent more annually and had a 1.9 percent higher probability of having health insurance. Black or African American, Hispanic or Latinx, and other workers of color are overrepresented in the service sector, making up 53.3 percent of the custodial workforce nationwide compared with 37.9 percent of the overall workforce. Policies that improve racial equity are crucial in this sector, and prevailing wage laws can help achieve this goal.

Figure 2

Effects on employment

Many economists have long agreed that minimum wages induce few to no unemployment effects while offering overwhelming benefits for low-wage workers.3 Despite these findings, opponents of wage floor policies such as prevailing or minimum wage laws conjecture that these laws decrease employment. The Manzo and Bruno study finds similarly mixed effects on hours worked and employment levels. Service sector prevailing wage laws increased the hours worked per week for all janitors without bachelor’s degrees by 5.8 percent overall, and janitors of color without bachelor’s degrees saw a much larger increase in full-time work than white janitors—a 9 percent increase in hours worked per week compared with a 1.4 percent increase. The share of janitors employed full time was 4.7 percentage points higher in states with service sector prevailing wage laws than in those without, suggesting that the additional hours reflected a shift to more full-time work. The study also found that employers hired fewer janitors to work full time at higher wages rather than hiring more janitors part time. Manzo and Bruno found that service sector prevailing wages laws reduced the proportion of workers employed as janitors by 7 percent—a consistent result across racial and ethnic groups.

What are other likely effects of service sector prevailing wage laws?

Although Manzo and Bruno’s findings are novel, they closely mirror effects of other more frequently studied wage floor policies—including prevailing wages in the construction sector; service sector living wage laws, which set minimum wages at levels sufficient for workers to support themselves given local costs of living; and general minimum wage laws. Researchers find that these other policies promote similar worker-level benefits—including increased pay, reduced racial wage gaps, and higher job standards sectorwide. They also bring a range of other benefits that one may also expect from service sector prevailing wages, including increased worker productivity, lower employee turnover rates, and increased competition for government contracts—all of which mitigate the overall impact of higher spending on worker compensation and help promote the wise use of public resources.

For example, researchers have found that prevailing wage laws in construction increase productivity in public road and bridge construction by 31 percent,4 strongly reduce rates of injury,5 and increase access to apprenticeships.6 And wage floors can cause a dramatic decline in worker turnover: After implementing a living wage, San Francisco International Airport saw an overall reduction in turnover of roughly 60 percent among service workers at firms that increased wages by more than 10 percent,7 and a living wage law for service contract workers in Los Angeles prompted a 35 percent fall in turnover.8 Living and prevailing wage laws have been found to encourage more bidding competition as contractors no longer feel compelled to race to the bottom by slashing wages to win contracts.9 Many contractors have indicated that a level playing field encouraged them to compete on contracts they otherwise would have ignored.10

Prevailing and living wage laws have also been found to shift work into local labor markets and prevent employers from paying poverty-level wages. This means that government does not need to supplement poverty wages with public assistance. Specifically, construction prevailing wage laws keep government spending from leaking out of local economies by encouraging contractors to hire locally,11 and they can increase tax revenues.12 In states with prevailing wage laws that require employers to pay enough to support workers and their families, fewer workers receive aid from programs such as the Supplemental Nutrition Assistance Program (SNAP). This eases government finances13—and helps reduce poverty.14

By keeping job standards high, prevailing wage laws protect the gains workers achieve through collective bargaining. Standardized labor costs prevent low-road contractors from cutting pay just to outcompete employers who pay fair, union-negotiated wages and benefits. When prevailing wage standards erode, unionized contractors are discouraged from bidding, reducing job stability and diminishing the hard-won gains of union negotiation.15 Furthermore, prevailing wage laws in areas with strong unions ensure that workers who are unable to bargain still benefit from higher wages and better benefits. Uniform wages and benefits across local sectors also alleviate gender and racial pay gaps.16

How can policymakers build successful prevailing wage laws?

Policymakers at every level of government can raise standards for workers, increase opportunity for businesses, and ensure wise use of public resources by enacting and strengthening service sector prevailing wage standards. In 2020, the Center for American Progress published detailed guidance for federal, state, and local policymakers seeking to advance these sorts of proposals.17 As only eight states have adopted service sector prevailing wage standards, there is significant room for expansion. Even jurisdictions with existing service sector prevailing wage laws can do more to guarantee that their protections uphold high standards for all workers whose jobs are funded through government spending.

For example, the SCA covers only workers employed through direct government contracting, even though the government supports private sector jobs through hundreds of billions of dollars in grants, loans, and tax incentives every year. And, as discussed above, state and local prevailing wage laws typically cover janitors and custodians but do not consistently cover other service sectors. Strong prevailing wage protections should extend across the service sector and cover all types of spending so that all government funding supports good jobs.

Policymakers should design wage- and benefits-setting requirements to generate the strongest wages possible so that government contracting does not erode standards in the private sector and low-road contractors are not able to undercut the market or undermine collectively bargained wage rates. Moreover, policymakers should require employers to pay the higher of either the prevailing wage or a contract minimum wage, as is mandated by the federal government and New York City; grant experienced workers a right of first refusal when a contract is rebid; and factor collectively bargained compensation rates into wage-setting mechanisms, as is the case in Connecticut and Bergen County, New Jersey.18

Finally, policymakers at all levels of government must adopt strong penalties for violators, prioritize agency enforcement funding, and empower workers to stand up when their rights are violated. All too often, contracting companies violate wage standards because penalties are low and infrequently used. To make matters worse, understaffed enforcement agencies do not have the capacity to police all lawbreakers.19 For example, a recent report from the Government Accountability Office found that federal contractors providing security and janitorial, mail hauling, and call center services shortchanged their workers $224 million over a five-year period.20

In order to combat such lawbreaking, New York state and California allow workers to bring lawsuits against companies that violate their contract by paying less than the prevailing wage. Workers can bring lawsuits to recover owed wages and remedies on behalf of themselves and other affected workers.21 Other jurisdictions have adopted partnerships with worker advocates to ensure that victims of wage theft are both aware of their rights and willing to come forward.22

Conclusion

Prevailing wage laws for government service contracts can uplift wages and benefits and reduce the racial pay gap in jobs heavily staffed by workers of color while potentially offering a host of advantages for turnover, service quality, local budgets, and collective bargaining. To deliver strong wage and benefit growth to service workers, policymakers at the federal, state, and local levels should promote comprehensive, well-enforced service sector prevailing wage laws that protect workers and their families.